Consumer confidence: Americans pessimistic, economists aren't

Economists say sluggish growth and sagging consumer confidence aren't signs of another recession but indicate that the nation's financial recovery will be slow going.

Shannon Stapleton/Reuters

A man shops for an oven at a Home Depot store in New York Thursday. Economists say that the economy is stuck in a period of slow growth caused by the lingering effects of the financial crisis and the housing bust.

What does a recent dive in consumer confidence about the economy mean – that America is just in a rough patch or something worse, like a new recession or "lost decade" ahead?

That's become the question of the moment, punctuated Friday by signs of slowing economic momentum.

The growth of gross domestic product dipped to 2.4 percent in the second quarter, the government reported, down from 3.7 percent annualized pace in the first quarter. And a Reuters/University of Michigan index of consumer sentiment fell in July. Two other measures, the Conference Board's index of consumer confidence and the TIPP poll's economic optimism index, have fallen for two months in a row.

Although these indicators are shifting for the worse, most forecasters see a dip back into recession as unlikely. Instead, they generally say the economy is simply stuck in a period of disappointingly slow growth due to the lingering effects of the financial crisis and housing bust.

In short, they say it's a time for patience and modest expectations, perhaps, but not time to throw in the towel on the US economy's prospects.

It's a point that President Obama, the nation's cheerleader in chief, tried to hammer home in a visit to Detroit Friday.

"I want you all to know I will bet on the American worker any day of the week," he told a cheering crowd of Chrysler workers. "I have confidence in the American economy.... We are coming back."

But he added that he still has work to do for the economy.

A poll of economists, surveyed by USA Today, found that most have become less optimistic about the economy over the past three months, just as ordinary Americans have. But their average forecast is still for growth, not recession. They call for a GDP growth rate of 2.5 percent in the second half of the year, and slightly higher next year (reaching a 3 percent pace in the third quarter of 2011).

The case for tempered optimism hinges on the view that positive forces can begin to reinforce one another: consumers spending more, incomes rising, businesses regaining confidence to hire and invest. Americans' disposable income edged up, on an inflation-adjusted basis, in the first quarter of the year. Consumer spending has been rising since the middle of last year. Business investment, outside of the housing industry, showed a strong gain in the second quarter.

"I just see a lot of things lining up positively," says Stephen Rose, a Georgetown University economist who recently wrote the book "Rebound: Why America Will Emerge Stronger from the Financial Crisis."

Mr. Rose concedes that it's possible a "double dip" could occur, sending the economy back into recession for a brief time. And he favors continuation of some government stimulus policies, such as aid for the unemployed and for cash-strapped state governments, that will help fuel demand while the recovery gets under way.

But he expects the economic recovery will continue, and that employment growth will reach a sufficient pace – about 250,000 new jobs per month – to bring the unemployment rate dipping below 7 percent by 2013.

Some pessimistic forecasters say it's possible the nation will struggle through a "lost decade," similar to Japan's experience in recent years. Rose says several forces should help the US avoid that outcome, including the entrepreneurial character of its economy. "No buildings were destroyed" by the recession, he says. "Nobody lost their smarts."

One place where he and many of the pessimists agree: The nation's banking system remains a weak spot. Often, recoveries after a financial crisis are slower than those after more typical cyclical recessions.

The aftermath of the crisis may also explain why many consumers feel uncertain about their financial future. Household debt levels remain high. Still many economists say that it's possible for households to repair their finances while also contributing to economic growth through their spending.